There are two objectives of this article: (i) It is discussed theoretically
how the dynamics of pricing decisions of multiproduct retailers can be explained. (ii) It is analyzed empirically by use of
scanner data how prices are actually set and how consumers react
at the point of sale to price changes and promotional activities by
retailers. The empirical evidence focuses on breakfast products in
general and jam and breakfast cereals in particular. Main results are
the following:
1. Theory of optimal pricing by multiproduct firms suggests that
direct and cross price elasticities of demand and marginal costs
determine the profit-maximizing price at one point of time. Good
reasons do exist additionally for multiproduct retailers to vary
prices intertemporally. Sales, e.g., can be consistent with optimal
intertemporal pricing.
2. Scanner data for German food retailers in the period September
1996 – June 1999 are utilized in the empirical analysis. The law of
one price does not hold for individual branded foods across
store types. Price dispersion varies by product. The impact of
sales is high in grocery retailing; on average for 20 food categories,
one product of a category was on sale every other week.
3. Promotional activities affect demand for branded products
strongly, but impacts on quantities varied widely. They were
above average for coffee, a storeable product, below average for
fresh milk, a less storeable good. In some cases, these effects
are so strong that consumers seem to buy the brand only when it
is on sale.
4. In the special case of jam, prices are lowest in discounters and
highest in supermarkets. The spread of prices is also lowest in
discounters and highest in supermarkets. Price-elastic reactions
at the point of sale was, however, a uniform pattern across all
store types of grocery retailing. The strongest reaction was
found in supermarkets with a price elasticity of demand of –5.09.
5. For breakfast cereals, strong reactions by consumers occur to
various promotional activities. Impacts on demand were, e.g., as
high as 175 % when the instruments sales, display and leaflet
were combined. Sales were an important feature of promotional
activities with a strong demand-increasing effect.
Summing up, it can be concluded that an active price policy of
grocery retailers is a crucial component of their marketing mix. This
is compatible with the finding of a strong price responsiveness of
consumers. The stylized fact that the price elasticity of food demand
is absolutely low, may be correct for aggregate demand but is not
confirmed at the store level. On the contrary: High absolute levels of
the store-level price elasticity of demand are typical for branded
foods.